The Cost of Targeting Wealth: Risks for the UK Economy

Sophie Bell
Aug 25
3 min read

The idea of a UK wealth tax has resurfaced in political debate. But behind the headlines lies a complex economic reality, one with the potential to significantly damage the UK’s appeal as a destination for wealth creation, investment, and entrepreneurship.

A wealth tax, or even significant reform of the existing inheritance tax (IHT) or gifting regime would unquestionably undermine the UK’s appeal as a location for wealth creation. High Net Worth Individuals (HNWIs) who would otherwise look to invest, base their families or build businesses in the UK are now actively reviewing options in jurisdictions with more predictable and stable long-term tax environments.

The Liquidity Trap of Wealth Taxes

One of the biggest practical challenges of a wealth tax is that wealth is rarely held in liquid form. Often, it's tied up in property, privately held businesses, or long-term investments, rather than in cash. For individuals affected, this creates a serious pressure for taxpayers to either restructure their portfolios or divest entirely to meet tax obligations. The economic ripple effect of such choices could be far-reaching, impacting not just individuals, but also employees, supply chains, and broader investment confidence.

A Shifting Landscape for Entrepreneurs and HNWIs

Alongside a potential wealth tax, changes to the UK’s non-dom regime taking effect from October, have also made it more attractive for HNWIs to leave the UK. Where once it was predicted that only a fraction, around 0.5% of non-doms might relocate, new estimates suggest that up to 10% have either already left or are planning to leave. And this figure may continue to rise as families weigh up long-term residency decisions.

Furthermore, the changes from October also provide a new incentive for UK doms to leave the UK. Previously a ‘Brit’ who left the UK would still be subject to UK inheritance tax at 40% of their worldwide estate, unless they could show that they had fully severed their ties to the UK and they were no longer a UK domicile.

Now, a Brit with substantial wealth can leave the UK, and escape UK IHT (on their non-UK assets) after being a non-UK resident for 10 years. This means that Brits reaching retirement age may choose to move abroad, become a non-UK resident, visit the UK from time to time but ultimately avoid paying UK IHT (at 40%!) on their non-UK assets. This often goes hand-in-hand with moving capital offshore, an outcome that’s undeniably detrimental to the UK’s long-term economic outlook.

What Does This Mean for the Economy?

The top 1% of earners already contribute over 29% of all UK income tax. Additionally, HMRC figures show that foreign and non-dom HNWIs contributed £12.3 billion in income tax, capital gains tax, and national insurance in the 2022/23 tax year alone. That number has almost certainly grown since, reinforcing the direct value of high earners to the UK.

The value of having HNWIs living and thriving in the UK goes beyond direct tax receipts. Many are business founders or investors who generate employment, stimulate local economies, support charitable causes, and bring valuable skills, capital, and infrastructure to the UK. While a wealth tax might appear to offer a short-term fiscal gain, the longer-term consequence could be the departure of exactly the individuals who contribute most significantly to economic growth.

A Tipping Point in the Debate

As speculation swirls, our advice to HNWIs is to ensure that any decisions around wealth structuring, gifting, or asset ownership should be part of long-term succession planning, not short-term political panic.

Even Rachel Reeves has downplayed the notion of a wealth tax, stating that "a fantasy wealth tax would only succeed in driving away investors from Britain." This reinforces that this entire debate may yet prove to be a storm in a teacup. But the storm has already created waves. And if policy shifts to reality, the UK could face an irreversible outflow of wealth, talent, and investment, at a time when it can least afford it.